Multicomponent signals and financial constraints

ABSTRACT

The inventive process creates knowledge asymmetries between research-intensive firms and external investors, making it difficult for firms to obtain funding for inventive activities. Consequently, most research-intensive firms face financial constraints (FC). Some suggest patents act as signals to reduce asymmetries, attracting external financing. Yet, prior findings are mixed. We integrate literature on FC with signaling to explore these inconsistent conclusions. We argue ambiguity in previous studies results from examining patents as sending a single signal. We examine impacts of three firm-level attributes on FC – use of emergent technology inputs, firm age, and repeat alliance partners. We demonstrate consideration of multiple simultaneous signals provides better insights into the patenting-FC relationship.

KEYWORDS:

• Investors
• patents
• signaling
• financial constraints

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Edward Levitas specialises in strategic management and the management of innovation. His research activity focuses on technology and new product development, particularly among biotechnology and pharmaceutical firms. He has examined how strategic alliances, financial asset availability, technology transfers, and managerial incentives affect firm innovation and survival. He is part of team that received a National Science Foundation grant to examine the impact gender, racial and experiential diversity has on innovative outcomes. He also examines how principles of Behavioral Economics impacts strategic decision-making. His work has appeared in publications such as the Academy of Management Journal, Competitive Intelligence Review, International Journal of Organisational Analysis, Journal of Engineering and Technology Management, Journal of Management Inquiry, Journal of Management, Journal of Strategy and Management, Journal of World Business, Organisation Science, Small Business Economics, the Strategic Entrepreneurship Journal and the Strategic Management Journal. He was formerly an associate editor of Journal of Management, and serves on the editorial boards of the Strategic Management Journal, the Academy of Management Journal, the Journal of Management, and the Journal of Management Studies. He has also worked as a laboratory scientist, a securities research analyst, and a financial officer of a small Cincinnati firm.

M. Ann McFadyen is an associate professor of strategic management at the University of Texas at Arlington. She received a BBA and an MBA from Texas Tech University, and her Ph.D. in strategic management from Texas A&M University. She is an active researcher who examines strategic implications of knowledge creation, invention/innovation, exchange networks, strategic alliances on performance. Her work has appeared in Harvard Business Review, Academy of Management Journal, Strategic Management Journal, Organisation Science, Journal of Management, Strategic Organisation, Journal of Product Innovation Management, Research Technology Management, Journal of Engineering & Technology Management, Journal of Occupational Health Psychology, and Journal of Organisational Effectiveness: People and Performance. Before joining the faculty of UTA, she was on faculty for 7 years at North Carolina State University as a tenured associate professor in the Management, Innovation and Entrepreneurship department. Prior to her career in academics, she spent 14 years in corporate banking in global treasury new product development with a large global financial institution.

ORCID

Edward Levitas http://orcid.org/0000-0003-0427-989X

M. Ann McFadyen http://orcid.org/0000-0001-9969-3545

Notes

1 Financially constrained firms may lack organizational slack, uncommitted resources linked to innovation (Cyert and March 1963). Without slack firms may lack the resources to adequately compete with firms possessing slack resources (Bourgeois 1981; Cheng and Kesner 1997).

2 Patent A granted in 2005 and cites patents granted in 2003 and 2002. The average age of cited patents is 2.5 $\left({\displaystyle \frac{\left(2005-2003\right)+\left(2005-2002\right)}{2}}\right)$. The average age of citations is < three, thus this patent is based on emerging technologies. In contrast, Patent B granted in 2005, citing patents granted in 1991 and 1990. The average age of these cited patents is 14.5 ${\displaystyle \frac{\left(2005-1991\right)+\left(2005-1990\right)}{2}}$; Patent B is not based on emerging technologies.

3 Other FC measures (Kaplan and Zingales 1997; Whited and Wu 2006) suffer from ‘endogeneities’ (Hadlock and Pierce 2010), incorporating debt. Inventively-active firms eschew use of debt since their highly intangible assets minimizes collateral needed to secure lending. Financially constrained firms may avoid borrowing. Since the absence of debt lowers KZ and WW Indexes, use of these indexes suggests lower FC in highly constrained firms.